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Most people will face at least a couple of large expenses at various points in their lives — and it’s usually smart to prepare for those expenses by saving over time to cover them.
For example, when you want to buy a car, put a down payment on a home or take a vacation, you may need to save to do so. And that can be challenging in today’s inflationary environment. After all, if you fail to earn a return that’s equal to or more than the current 3.1% inflation rate,your cash will lose buying power.
But that doesn’t have to be the case. The high inflation rate has led the Federal Reserve to increase its target federal funds rate —driving returns on deposit accounts higher in the process. One of the best ways to tap into inflation-beating returns is with a 5-year certificate of deposit (CD). These accounts offer compelling APYs, and they allow you to lock in strong returns for five full years. But how much money would you make if you deposited $25,000 into a 5-year CD right now?
Compare today’s leading CD options.
Here’s how much $25,000 would earn in a 5-year CD
The amount of money you can earn by depositing $25,000 into a 5-year CD right now depends on the CD you choose, as rates and terms can vary by bank or credit union. So, it’s important to shop around.
Some of today’s best 5-year CD rates are available at SchoolFirst Federal Credit Union (4.60% APY), First Internet Bank of Indiana (4.59% APY) and Popular Direct (4.45% APY). These accounts all offer rates that are significantly higher than the current 3.1% inflation rate — but what do those APYs mean for the potential returns?
SchoolFirst Federal Credit Union – 4.60% APY: You would earn $6,303.90 after five years for a total balance of $31,303.90 at the end of your term.First Internet Bank of Indiana – 4.59% APY: You would earn $6,288.94 after five years for a total balance of $31,288.94 at the end of your term.Popular Direct – 4.45% APY: You would earn $6,080.09 after five years for a total balance of $31,080.09 at the end of your term.
While a 5-year CD can produce meaningful gains, you don’t have to have $25,000 to deposit in order to take advantage of today’s high interest rates. For example, here’s what you would earn on a $10,000 5-year CD with these financial institutions:
SchoolFirst Federal Credit Union – 4.60% APY: You would earn $2,521.56 after five years for a total balance of $12,521.56 at the end of your term.First Internet Bank of Indiana – 4.59% APY: You would earn $2,515.58 after five years for a total balance of $12,515.58 at the end of your term.Popular Direct – 4.45% APY: You would earn $2,432.03 after five years for a total balance of $12,432.03 at the end of your term.
Compare some of the highest-paying CDs on the market.
Why you should open a 5-year CD right now
The most important reason to consider opening a year 5-year CD right now is that interest rates are high, but that may not be the case ahead.
“Rates are likely going to decline so you are trying to capture the highest longer term rate that you can before they regress,” says Matt Willer, managing director and partner at Phoenix Capital Group.
Experts predict that the first Federal Reserve rate cut of the year will come in June— but there are chances it could happen sooner. When that rate cut takes place, CD rates will likely fall as well. As such, the window of opportunity to take advantage of today’s high CD returns may be closing.
However, that’s not the only reason to consider opening a CD. Some other reasons CDs include:
Safety: CDs are generally safe. The returns fixed, and in turn, are not subject to the ebbs and flows of financial markets. And, the accounts also typically come with FDIC or NCUA insurance on balances up to $250,000.Disciplined saving: You’ll typically pay a penalty if you tap into your CD before the end of its term. As such, these accounts may make it easier to reach your savings goals, as you’ll be less likely to tap into the money in your CD before you need it.
The bottom line
You stand to earn a meaningful return if you open a 5-year CD at today’s highly competitive interest rates. Then again, the window of opportunity to do so may be closing quickly. Compare some of the top CD options now to lock in today’s high rates.
Joshua Rodriguez is a personal finance and investing writer with a passion for his craft. When he’s not working, he enjoys time with his wife, two kids and two dogs.
